Speeches by Richard W. FisherDallas, Texas | February 23, 2006

Asia, Trade Deficits and the Health
of the U.S. EconomyRemarks before the Greater Dallas
Asian American Chamber of Commerce

I want to thank the Greater Dallas
Asian American Chamber of Commerce for the opportunity
to speak here today. I was truly impressed to learn
that your organization is the largest Asian-American
chamber in the United States, with 1,200 members.

Asian-Americans have achieved
remarkable success and are a shining example of what
can be achieved in this ongoing, unfinished experiment
we call America. If you take a look at the Census Bureau’s
Current Population Survey, you will see that the average
income of Asian households was $56,664—more than
$12,000 above the U.S. average of $44,473. But the importance
of the Asian-American community is not measured only
by income level. You have ties to a wide range of countries
where I spent a great deal of time during the second
four years of the Clinton administration negotiating
market-opening trade agreements—China, Japan,
Korea, Taiwan, Vietnam, India and many others. The economies
of Dallas and of Texas benefit from the presence of
the many internationally savvy businesspeople who belong
to this chamber.

You are part of a growing economic
connection between Texas and Asia. I am not sure how
many of you know that Texas ranks No. 1 among the states
in exports—with 14.5 percent of the U.S. total,
eclipsing California’s 13 percent. Mexico, of
course, is far and away our leading foreign market due
to geographic proximity, but Asia has become quite important,
too. Overall, nations across the Pacific buy 24 percent
of our exports, more than twice Canada’s share.
Five of Texas’ top seven overseas markets are
in Asia—China, Korea, Taiwan, Singapore and Japan.
China has been Texas’ fastest growing export market
since 2002.

Texas’ growing exports are
just part of the larger topic I want to talk about today:
the global economy and America’s position in it.
Before doing so, I’ll issue the standard disclaimer
of all Federal Reserve officials and those who sit on
the Federal Open Market Committee: My views are just
that—my own, assisted greatly by the magnificent
research team backing me up at the Dallas Fed.

The U.S. economy is strong and
very competitive. The economy is in something of a sweet
spot right now. We have faced terrorist attacks and
natural disasters, and yet our economy continues to
steam along at a pace that forecasters estimate will
in this current quarter be somewhere north of 4 percent,
net of inflation. A total of 135 million Americans are
at work. Unemployment has dropped to 4.7 percent, the
lowest rate in four years. The underlying trend of core
inflation has been running at roughly 2 percent, despite
record-high energy prices.

Our economy is performing well,
but we all know about threats to our long-term prosperity
and what needs to be done to prevent them from metastasizing.
In addition to protecting our nation from Al Qaeda and
other aggressors, on top of most lists would be the
urgent need to rein in the fiscal deficits, solve the
long-term imbalances built into our retirement and health
care systems, and repair our educational system.

Some will argue that we also need
to protect ourselves from new sources of competition,
like China and India. Indeed, there is a movement afoot
in the Senate to impose a 27.5 percent levy on $243
billion of Chinese imports; in effect, it seeks to make
American consumers and other importers pay a tax of
$67 billion to protect themselves from cheap imports
from China. Today, I am going to argue that that is
precisely the wrong thing to do—not because it
is readily transparent that an onerous tax on Chinese
imports would be inflationary or because it would simply
lead to the displacement of imports from China to other
foreign sources, such as Vietnam. The underlying instinct
implicit in this proposal—that we must protect
ourselves from competition—is, in my humble opinion,
faulty. We should embrace competition and exploit it
to continue making ourselves even stronger.

But first, let me put the United
States in perspective.

The United States produces $12.6
trillion a year in goods and services. That is big.

How big? Well, the Twelfth Federal
Reserve District, headquartered in San Francisco, produces
more output than all of China. The Eleventh District,
headquartered here in Dallas, produces 20 percent more
than India.

The incremental growth of the
U.S. economy is in and of itself impressive. Let’s
be conservative and assume we grow in 2006 at last year’s
estimated rate of 3.5 percent, a rate that stands a
good chance of being recalibrated upward when the final
numbers are done. Growing at 3.5 percent for a year,
we add $440 billion in incremental activity. That exceeds
the entire output of all but 15 other countries. Every
year, we create the economic equivalent of two Indonesias,
three Thailands, four Malaysias or 11 Vietnams. Year,
after year, after year.

In dollar terms, America’s
3.5 percent is equivalent to surges of 16 percent in
Germany, 20 percent in the U.K., 26 percent in China
and 70 percent in India.

Of course, our growth is driven
by consumption, a significant portion of which is fed
by imports, which totaled $2 trillion last year. Our
annual imports—what we buy in a single year from
abroad—exceed the total output, the GDP, of all
but four other countries. Our consumption provides a
significant impetus for economic growth in the rest
of the world.

We buy from the world a heck of
a lot more than we sell. Last year, the trade deficit
was estimated to have been $726 billion, a mighty big
amount. A fourth of that was with China.

Some see this as a threat. After
the recent trade deficit was announced, the Financial
Times of London quoted one commentator as saying,
“These exploding deficit numbers are not a sign
of strength; they are a sign of weakness. They indicate
a slow bleeding at the wrists economically for the United
States.”

Some very influential policymakers
and analysts, maybe even some of you in this very audience,
are tempted to agree.

Before doing so, I would respectfully
suggest that they do some simple math.

Let’s examine the assertion
that trade deficits are a sign of weakness by going
back to look at what has happened to the U.S. economy
since we last ran a trade surplus in 1975. Since that
year, we have been running trade deficits that increase
with each successive decade: to one-half of 1 percent
of GDP in 1980, 1.3 percent of GDP in 1990, 3.9 percent
of GDP in 2000 and 5.8 percent of GDP last year.

In 2005 dollars, per capita disposable
personal income in 1975 was $17,019. Today, it’s
$30,429.

In 2005 dollars, mean household
net worth was $195,000 at the end of 1975. Today, it’s
$434,000.

What these numbers tell us is
that since 1975, the American people have become better
off by a factor of two.

What about those among you who
are investors? How have you done?

The Standard & Poor’s
500 Index closed 1975 at 90. It closed yesterday over
14 times higher, at 1,292.

The Dow Jones industrial average
closed at 852 in 1975. Last night the Dow closed at
11,137.

The purchasing power of consumers
and investors has increased to a far greater degree
than just their income levels and net worth because
many of the things we buy and use have become better
at ever-cheaper prices since 1975.

In 1975, a 19-inch Sears color
TV cost $359.95 and a 25-inch console was $599.95. Today,
a 20-inch Magnavox is $118.99 and a Sharp 27-inch model
is $200.99. Today’s models have a much better
picture, last longer, use less electricity and come
with a whole host of added features, such as remote
control.

The first PC, the Apple I computer,
sold for $667 in 1976. It ran at the speed of 1 to 2
megahertz and had a 4k memory. Just $500 spent today
on, say, a Dell Dimension E310 with a Pentium 4 processor
will get you 2.87 billion times the processing power
and millions of times the memory, with a free flat-panel
screen and lots of other features.

In 1975, when I graduated from
Stanford Business School, they didn’t have very
sophisticated handheld calculators for financial analysts.
In 1981, I bought this little guy, an HP12C calculator,
which most investors will tell you is all you need to
do the financial calculations of portfolio management.
I use it to this day. It cost me $150. A couple of days
ago, if you were to have looked on eBay as I did, you
could have bought an HP12C for $5.

What the numbers tell you is that
we are far richer as individuals and as a nation than
when we last ran a trade surplus. We are hardly “bleeding
at the wrists economically” or becoming weaker
as we have incurred trade deficits.

This is not to say that we can
sit back, indifferent to the future. Presently, what
we buy—oil from the OPEC countries, consumer electronics
from the Asians, foodstuffs from Mexico—comes
from countries that are not providing significant outlets
at home for investing their savings. To continue to
finance our external trade and current account imbalances,
we have to be a magnet for the world’s surplus
capital, attracting the investment money of those from
whom we buy goods and services. The process recycles
the money we pay out for purchases abroad back into
our economy in the form of investments that make us
richer, stronger and better positioned to compete more
aggressively in trade markets.

Here is the point: To be able
to afford what we consume, we must continually improve
ourselves. We must continue moving up the value-added
ladder while others replace the work we used to do on
the ladder’s lower rungs.

One of my favorite economists
was a Czech-born professor from my alma mater named
Joseph Schumpeter. He coined a term that appears to
be a contradiction in terms but captures the essence
of what is required to succeed in a fiercely competitive
world: “creative destruction.” The United
States has harnessed this process and made it work to
constantly improve our global economic standing. Americans
are masters of creative destruction.

What do I mean when I say that?
Well, let’s go back to the original expression
of the term.

In his book Capitalism, Socialism,
and Democracy, Schumpeter wrote the following:
“The fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new consumers’
goods, the new methods of production or transportation,
the new markets, the new forms of industrial organization…[and]
incessantly revolutionizes the economic structure
from within, incessantly destroying the old one,
incessantly creating a new one. This process of Creative
Destruction is … what every capitalist concern
has got to live in.”

In his book, Business Cycles,
Schumpeter wrote: “A railroad through new country,
i.e., country not yet served by railroads, as soon as
it gets into working order upsets all conditions of
location, all cost calculations, all production functions
within its radius of influence; and hardly any ‘ways
of doing things’ which have been optimal before
remain so afterward.”

Here is where China and India
and all the bristling new economic entrants come in.
They are today’s equivalent of Schumpeter’s
railroads. They and the phenomenon of globalization
are agents of creative destruction writ large. From
now on, hardly any way of doing things which used to
be optimal will ever be so again.

Creative destruction is by no
means painless. Let’s go back to 1975 again.

Since 1975, as we started down
the path of running ever-larger trade deficits, over
141 million Americans have filed unemployment claims.
If you assume that there are others who either didn’t
qualify to file or didn’t bother, you might reasonably
conclude that 175 million jobs have been lost since
1975. That is the destructive side of creative destruction.
That is the painful side for people like my dad who
lost their jobs and more than once had to retrain for
another one.

But then the creative side steps
forward. Since 1975, the economy has replaced the jobs
lost and more, adding another 57 million net new jobs
to accommodate youth entering the workforce, a surge
in immigrants and—very important—significant
numbers of women who joined and enriched the workplace.
This is the gratifying part of the process. This is
the good news. If we create the conditions to let our
private sector do what it does by its very nature—constantly
adapt and reposition itself—then we have nothing
to fear from competition from our trading partners,
including those with whom we presently run big deficits.

We do, indeed, have some tough
competitors out there.

But we have some unique advantages.

America’s economy encourages
change. We provide a healthy environment to nurture
entrepreneurs. We have not saddled the private sector
with regulations that interfere with hiring and firing
or dictate outmoded methods of production.

Consider this: Starting a business
takes five days in the United States, compared with
45 days in Germany, 108 in Spain and no one knows how
many in China. We let labor, capital and companies compete—within
the country and with the rest of the world. Our economy
continually reorganizes itself to take advantage of
new technologies, freeing labor from old jobs so it
can move to new, higher-value uses.

The agent of reorganization is
not the government or the central bank but the talent
of our business managers, something that economists
rarely talk about. These managers are the key to our
continued adaptation and growth. They are our greatest
comparative advantage.

I like to say that the managers
in our business community serve as the nerve endings
in Adam Smith’s invisible hand, stretching capitalism’s
fingers into every corner of the world to extract value
at the lowest cost—in order to enhance productivity.

I am not talking just about CEOs
who get paid big bucks. I am talking about the millions
of middle managers who operate supply chains, control
inventories and fine-tune operations.

Every day, these managers get
up and go to work to exploit those competitors who come
to market with cheaper products by buying those products
and using them as inputs for providing better deals
to their customers.

They are the masters of the best
manifestation of “creative destruction.”

They are the folks who exert the
gravitational pull for the recycling of those monies
we pay out to secure cheaper inputs. Their ability to
wring value out of all sources, everywhere, is what
makes the United States the preferred risk-adjusted
destination for surplus investment monies.

They are the people who enable
us to finance our external deficits, and inevitably
redress them.

They are the key to our transforming
what some perceive as a weakness into a fundamental
strength.

As long as the Federal Reserve
does its job of holding inflation at bay, and as long
as our political leaders resist protectionism and let
the private sector get on with its work, we will remain
the world’s predominant economic machine. If we
resort to protectionism and other forms of interference
with creative destruction, then we will indeed be slitting
our own wrists, draining the world of the lifeblood
of U.S. economic growth.

About the Author

Richard W. Fisher is president and CEO of the Federal Reserve Bank of Dallas.

The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.